Transcription:

Episode 26 – Mortgage Talk with Paul Zgalich from Guaranteed Rates
14:29

Jim: I want to welcome everyone back to the Blue Money Podcast. This is your host, Jim Donnelly. I’m here with my co-host, Kevin McGarry.

Kevin: Jimmy, what’s up man?

Jim: Man. We’ve got a special guest today, Paul Scarlet.

Kevin: Yeah, Pauley.

Jim: He’s from Guaranteed Rate. He’s the senior vice president at the mortgage landing and we’ve know Paul, for over 30 some years. I mean, where do we start with Paul Scarlett? So Paul, why don’t you give everyone a little bio information, man.

Paul: Hey guys, I appreciate you guys having me here. I’ve been actually in the mortgage business now going on 16 years. I started with a family operation back in early 2008, and currently I’m with a company called Guaranteed Rate. We are the second largest mortgage banker in the US.

Kevin: Wow. I’ll tell you what though, the one thing to get it out there, Jim, we do refer to Paul and he’s been great with our clients, so thanks Paul.

Paul: Absolutely. Absolutely.

Jim: So, we’re just going to start right off Paul. So, it’s a good time to buy a house. The mortgages are high, obviously the rates. Can you hit upon that a little bit about, what the rates are currently at in the sevens or is it a good time right now? People should wait it out?

Paul: Yeah, absolutely. So, we’ve been on such a roller coaster actually as of March of last year rates have been in the highest levels we have seen since the early two thousands, and it’s back like in the eighties when we saw actually 16% at one point. However, we’ve actually seen a good, good turning point right now where rates have actually almost come down to 1% over the last two and a half, three weeks. So, for a first time home buyer, it’s extremely challenging right now in this market because think about, it’s placing them out of the market where they can’t afford to buy a house. Currently rates are in the low sevens to upper sixes. A month ago you’re paying eight and a half to eight and a quarter percent, where a first time home buyer couldn’t afford a property. They were completely out of the market.

Kevin: I mean, so right now, if you’re that first time home buyer, what do you do?

Paul: Right now, I mean, I think there’s so many good programs that have come out for first time home buyers. Currently right now we have a special grant that guarantee rate offers for first time home buyers where we’re going to give you $3,000 back towards your closing cost. And basically what we do is we buy your interest rate down. So, if my rate today is at 7%, I can buy a borrower’s rate down to six and a half or six and five eights with our money. So, there’s grant money through the state of Pennsylvania, which is called PHFA, where you can get a 5% back on your purchase price. So, if you’re buying a house for 300,000, the state’s given you $15,000 towards your closing costs or down payments. So, they’re trying to come up with ways to overcome these high interest rates. But I think honestly, we are in the clear, rates are actually on their way down. The Fed has already talked about May of next year we’re going to see our first rate cut, which is unheard of. So, I think long term right now projection wise rates are going to be in the mid to low sixes, I would say by the spring of next year and hopefully early 2025, we’re going to see a five in front of these rates.

Kevin: Well, let me ask you a question. So, someone buys a home 30 year mortgage, seven, seven and a half rate 30 year rate. How long do you wait to refinance as rates come down?

Paul: Good question. So, the key is if you can save 1% in an interest rate is what you want to refinance. However, if it’s so new into the loan, if you’ve only been in the loan for six months and you can save three quarters of a point, it makes sense. You want to be able to recoup all of your costs in a refi within the first two to two and a half years. The problem’s going to be in this market, just like we faced in COVID, when is the right time to refi? Because let’s say rates continue to go down. I’ve refinanced one client three times in a year and a half during COVID, because I mean, it went to 5%, it went to 3%. I mean, the 30 year fixed at one point was two point a half percent. So, typically the industry says 1%. Okay, 1% in in reduction is where you want to be. However, high-end loan amounts are early in the loan. It’s actually okay if you’re half a percent of three quarters of a percent.

Jim: My question for you, Paul, is someone’s going to buy a first time home buyer and they’re looking at the different mortgages. There’s a 30 year fix, a 15 year mix, there’s an ARMS, there’s an escrow, what do you recommend? I mean, I know every situation’s different, but is there one as a mortgage broker that you kind of lean towards people down?

Paul: Yeah, absolutely. So, I was anti-ARMS, I was always against the ARM product. I just thought you’re putting such a client into a high risk program where…

Kevin: Paul, real quick to cut you off, but can you explain an ARM…

Paul: Exactly. There’s several different ARM products, but the common ones are, it’s called a 56 ARM, a 76 ARM, a 106 ARM. What that means is, it’s fixed for the first five years on a 56 ARM, it can adjust 1% up or down every six months. So, what happens is an example, you’re in a five year ARM, you’re at 7%. In year six, it can go up to 6% in the first six months, it can go up to 7% in the second six months. So at that point, I was never a fan of ARMs when I first got into the business. However, knowing what we know today where rates are only going to come down a five year ARM, eh, a little risky, but a seven year ARM is what I have sold a lot of. Anything can happen in seven years. The statistical average, the average person stays in a house seven years before they resell or refinance. So, me going into it, I’m okay with a seven year ARM for a client just as long as there’s a reduction in rate. So, today a 76 ARM, you’re probably at 6.5%. If a borrower can save a half a percent or three quarters of a percent in the first seven years, it makes sense knowing that you’re going to refinance out of that loan probably in 12 to 24 months. So, it makes sense. There are some people that don’t want that risk, they don’t want to worry about it. They want to know, hey, I got a fixed rate. I’m done. I’m done for the life of the loan knowing that I can refi. So, when I first got into it, I was against the ARM knowing more about it and understanding the market. It’s something that I sell a lot of.

Kevin: And right now, I mean, you and I spoke about this a couple weeks ago. We had a few clients that had equity lines in their homes and the rate popped. What’s your solution there?

Paul: So, what happens when you do a second mortgage? You have a first and a second mortgage. What you can do, you can actually refinance your second mortgage at any point that you want to. However, you can do what’s called a cash out refinance, pay your first off, I’m sorry, pay your second off and merge it into your first. The problem there is so many people on their first mortgage, their rates are so low compared to what we are today. So, if you have a bar where that’s got a high nine, 10% on the second, over the next six or seven months, you can refinance your second mortgage and keep it where it is in second lien position. So, I see the second home mortgage rates come down. I actually had a seminar yesterday with another bank and they were basically saying that you’re going to see a lot of second people refinance over the next 12 months.

Jim: Hey Paul, let me ask you this for our audience out there, what’s the biggest mistake that you see first time home buyers make?

Paul: The biggest challenge is living above your means. People going into a loan knowing that they’re going to live paycheck to paycheck with it. Knowing that this mortgage at this higher rate could actually impact what they do. There’s something called a debt to income ratio in our industry. A borrower can have a high DTI, which is basically 50%, which is a high number for a first time home buyer. The biggest mistake during the COVID years and when we had very little inventory, people were overpaying for properties. I mean, they’re overpaying to win. And now at that higher rate, they’re living above and out of their means. So, I do see the market settling down some, I do see a pullback in the market, but I think that’s the biggest challenge is people just jumping into something because there was no inventory. They had to buy that house and they overpaid for it with a higher rate.

Kevin: Yeah, I mean, you see that right now, even today, what’s the inventory?

Paul: Inventory’s still low today. So, it’s not as low as it was. It’s helping things. I mean, I had borrowers going in 50,000, 60,000, a hundred thousand over asking on a $500,000 property. So, if the house doesn’t appres, that’s money they’re coming out of pocket with. Then borrowers waiving home inspections. I mean, these are all the things that we’ve never seen in a typical market. So, I think again, the biggest challenge with people is just overpaying or just living out of their means.

Kevin: The one thing with retirement planning here, Paul, is we have a lot of clients that worked their whole life and now they’re downsizing. And you spoke about a lot today on rates potentially coming down. Do you got any advice for that retiree going into their next phase of life when they downsize and if right now they’re refinancing their home, they got a three, three point a half percent rate, what do you do?

Paul: It’s funny we’re starting to see something called a reverse mortgage. I don’t know if you’re familiar with that. More and more people, back in the early two thousands of reverse mortgage wasn’t really that popular because it was very costly. What happens now is people can borrow against their equity in their house as they retire, have no monthly payment and live off of that equity. Or just doing a straight home equity line of credit and living off of that if need be. I think this era or people that are retiring are going to have so much equity in their property. Because property values are going to continue to go up. So, you can live off of the equity in your house or you can do a reverse mortgage, which I think is going to be more and more popular.

Kevin: Right. I think too, like you said, like net worths are up and a lot of that is due to the equity in homes. I think if rates do start to come down, you can see a lot of movement potentially the real estate.

Paul: Yeah, I agree. And I think, five, 10 years from now, values are never going to come down. They’re never going to come down from where we are today, they’re going to continue to go up again, increases borrower’s net worth borrowing against your equity at a three to three point a half percent rate is ideal. I think that’s what you’re going to see. I mean, that’s going to be a great opportunity.

Jim: My last question for you, Paul, if someone’s going to refi or look looking to buy a home, how many quotes should they get? Should they shop around for mortgage brokerage, compare? I mean, is there a big difference between what people are charging?

Paul: When you’re with Pauley two times? No. You want to stick with me the whole time? No, absolutely…

Kevin: The cop. Yeah, we call the cops.

Paul: I mean, listen, I’m …

Jim: Turn that thing off.

Kevin: I love that thing.

Paul: I’m a big believer of just getting a second opinion. I tell clients all the time, give me the quote or show me the quote that you have, and if I can’t beat it, I’m going to tell you it’s a good deal. No one likes to lose. But getting a second opinion I think is beneficial. It really is. Just to see what else is out there. The more that you go out and have your credit pulled, it’s going to impact your score. So, if your score continues to go down, it’s going to impact what that rate’s going to be with each lender. So, just getting a second pain, I think is ideal which is probably the right thing to do.

Kevin: I think the most important thing here is you see the way Paul speaks about it, work with a professional when you’re doing this. Because the rate environment can crush you, both personally and it can hurt your credit. And when you sit down and work with Paul and his team, it’s been a great experience for our clients.

Paul: I think one thing you got to look at too, if you’re buying in our area and a borrower has a quote or a pre-approval from an online bank, you’re at a disadvantage in this market because the listing agencies that you’re working with an online banking, you might not get to the table on time. So, again, I think whether it’s me or someone locally, having a local knowledge in the market really, really helps.

Jim: Great advice. Paul, anything you’d like to add, Paul, before we wrap this podcast up?

Paul: No, I just appreciate you guys get me on here and Kevin still looks goofy.

Kevin: I’ll tell you what, Paul’s — I’ll ignore that one, but he’s probably the second best athlete that’s ever been on our podcast, Jimmy.

Jim: Yeah, who’s the first?

Kevin: You’re talking to him.

Paul: I love it, man.

Jim: You still lie, man.

Paul: Still alive. Thanks boys. Thanks for having me.

Jim: Appreciate man, Paul. So that’s going to wrap up the Blue Money Podcast today. I thank all the listeners for listening. If you have any questions, please don’t hesitate to reach out to Kev. We’re going to have Paul Scarlett contact information, the show notes. He does help us out with a lot of clients. He’s very trustworthy, good guy. We’ve known him for years. We highly recommend them.

Paul: Thanks guys.

Jim: So, everyone be safe.

Kevin: Be safe.